Income statement cogs fifo or cogs lifo net income

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Income statement: COGS FIFO OR COGS LIFO ? NET INCOME FIFO OR NET INCOME LIFO ? INCOME TAX EXP. FIFO OR INCOME TAX EXP. LIFO ? Balance sheet: INVENTORY FIFO OR INVENTORY LIFO ?
21 Illustration of LIFO/FIFO – continued Year 2 (inventory input costs decrease): Purchases of inventory: # of gallons x $ per unit = Total purchases 25,000 $4.00 $100,000 Sales of inventory in year 2 = 25,000 gallons FIFO LIFO Units x $/gal. = Total $ Units x $/gal. = Total $ Ending inventory: 7,000 $4.00 $28,000 6,000 $3.00 $18,000 1,000 $4.00 4,000 7,000 $22,000 COGS: 5,000 $5.00 $25,000 25,000 $4.00 $100,000 2,000 $4.00 8,000 18,000 $4.00 72,000 25,000 $105,000
22 Illustration of LIFO/FIFO – continued Year 2 (continued): Summary: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold FIFO: $ ________ + _______ - _________ = $ ________ LIFO: $ ________ + _______ - _________ = $ ________ FIFO Inventory + LIFO Reserve = LIFO Inventory Purch. = COGS = Purch. = COGS = Entry to adjust FIFO inventory to LIFO inventory at year-end: LIFO Reserve Cost of Goods Sold Which is greater (circle) ? Income statement: COGS FIFO OR COGS LIFO ? NET INCOME FIFO OR NET INCOME LIFO ? INCOME TAX EXP. FIFO OR INCOME TAX EXP LIFO ? Balance sheet: INVENTORY FIFO OR INVENTORY LIFO ?
23 Cumulative impact of year 1 and year 2 Difference FIFO COGS LIFO COGS LIFO >FIFO Year 1 $ 26,000 $ 37,000 + $11,000 Year 2 105,000 100,000 - $5,000 Sum $ 131,000 $ 137,000 + $6,000 Over the two year period, LIFO COGS exceeded FIFO COGS by $6,000 Cumulative difference in COGS? »» LIFO Reserve balance
24 Summary of the Impact of LIFO Relative to FIFO Balance Sheet effect: ▪ INVENTORY FIFO = INVENTORY LIFO + LIFO RESERVE balance for example, in Year 1: INVENTORY FIFO = INVENTORY LIFO + LIFO RESERVE $33,000 = $22,000 + $11,000 Inventory FIFO is $11,000 higher than Inventory LIFO Income Statement effect (before taxes) ▪ COGS FIFO = COGS LIFO - ΔLIFO RESERVE for example, in Year 1: COGS FIFO = COGS LIFO - ΔLIFO RESERVE $26,000 = $37,000 - $11,000 COGS FIFO is $11,000 lower than COGS LIFO Likewise , Gross Profit FIFO is $11,000 higher than Gross Profit LIFO Likewise , Operating income FIFO is $11,000 higher than Operating income LIFO Note: This relation follows from the adjusting entry made each year to convert the records to LIFO. The entry involves debiting or crediting COGS for the change in the LIFO reserve each year.
25 Summary of the Impact of LIFO Relative to FIFO It follows from the above impact of LIFO on COGS that ▪ The current period income tax effect (and thus, cash flow effect of LIFO relative to FIFO) is (INCOME TAX EXP FIFO - INCOME TAX EXP LIFO ) = ΔLIFO RESERVE * tax rate For example, in Year 1 (assuming a marginal tax rate of 35%): (INCOME TAXES FIFO - INCOME TAXES LIFO ) = ( ΔLIFO RESERVE * tax rate) = $11,000 increase in reserve * 0.35 = $3,850 INCOME TAXES FIFO are $3,850 higher than INCOME TAXES LIFO ▪ The current period net income (i.e., after tax) impact of using LIFO relative to FIFO is (NET INCOME FIFO - NET INCOME LIFO ) = ΔLIFO RESERVE * (1 -tax rate) For example, in Year 1 (assuming a marginal tax rate of 35%): (NET INCOME FIFO - NET INCOME LIFO ) = ΔLIFO RESERVE * (1 -tax rate) = $11,000 increase in reserve * (1-.35) = $7,150 NET INCOME FIFO is $7,150 higher than NET INCOME LIFO See illustration using General Motors Corporation disclosures on next page.
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